Japan’s economy contracted by nearly 2 percent during the third quarter due to a decline in exports following the imposition of US tariffs, marking the first shrinkage in six quarters, according to government data released on Monday. Automakers, in particular, experienced a significant drop in shipments after ramping up exports before the tariffs took effect.
Despite the contraction, economists believe that it is likely a temporary setback rather than the beginning of a recession. Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, attributed the contraction to factors such as regulatory changes affecting housing investment and a reaction in exports. He noted that while the economy lacks strong momentum, there are indications of a gradual recovery in the coming year or two.
Although the GDP figures for this quarter are seen as having a minor impact on the Bank of Japan’s interest rate decisions compared to inflation, some economists, including those close to Prime Minister Sanae Takaichi, believe that the data should be given more weight. Credit Agricole chief Japan economist Takuji Aida recommended against raising interest rates in December following the contraction.
The 1.8 percent contraction in GDP during the July-September period was lower than the 2.3 percent growth in the previous quarter and below the 2.5 percent contraction forecasted by economists. Exports were the main drag on growth as the impact of increased US tariffs was felt, with automakers cutting prices to offset the tariffs. Net external demand subtracted 0.2 percentage points from growth, reversing the positive contribution seen in the previous quarter.
Furthermore, housing investment was another factor weighing on growth due to stricter energy-efficiency regulations introduced in April. Private consumption, accounting for over half of the economic output, grew by 0.1 percent, indicating a slight slowdown compared to the previous quarter. Capital spending, a key driver of growth, exceeded market estimates by rising 1.0 percent in the third quarter.
Despite the weak GDP data, there are expectations for growth to rebound in the October-December period. The government is preparing a stimulus package to assist households in coping with rising living costs, with Finance Minister Satsuki Katayama indicating that the proposed economic stimulus could exceed 17 trillion yen ($109.94 billion).
Private-sector forecasts suggest a positive outlook for growth in the first half of next year, with expectations for measures to improve households’ income conditions and support consumption.